Question

You would like to buy a retirement home in Florence, Italy in 3 years. The type of home you want to buy currently costs $553,092, but you expect the price to rise at 2% per year for the next 3 years.

If your investments earn 6.37% APR compounded annually (nominal), how much do you have to invest in years 1 to 3 to be able to purchase your retirement home?

Answer 1

Current Cost of retirement home = $553,092

Cost of home will increase by 2% per year for the next 3 years.

Cost of home after 3 years = Current Cost*(1+Inflation rate)^n

where, Inflation rate = 2%

n = no of years = 3

Cost of home after 3 years = $553,092*(1+0.02)^3

Cost of home after 3 years = $586,945.66

So, you have accumulate the above amount in 1 to 3 years to buy your retirement home.

Caculating periodic annual investment needed to be made to accumulate the Future value in 3 years:-

Where, C= Periodic Payments

r = Periodic Interest rate = 6.37%

n= no of periods = 3

Future Value = $586,945.66

C = $183,698.49

So, the amount you have to invest in years 1 to 3 to be able to purchase your retirement home is $183,698.49

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